During the company’s investor day in New York, he said loan modifications can be successful “if done properly,” meaning if important things like income are actually verified the second time around.
He noted that a loan modification completed before a borrower becomes delinquent resulted in losses of just 4 percent.
For borrowers who receive loan mods after they fall behind on payments, just 12.4 percent are 90 days or more late assuming the bank was able to verify income (what about 30 day/60 day lates?).
In cases where the bank does not properly verify borrower income, the re-default rate shoots up to 26.2 percent.
Still, the numbers Scharf came up with today are far below what has been seen in the press lately; like the OCC/OTS numbers which exceeded 50 percent.
Of course, those earlier estimates could be based on a larger number of simple repayment plans, which don’t actually make loans more affordable.
In mid-December, subprime servicer Ocwen Financial said the re-default rate on loans it services was 24.6 percent, well below the rate seen at the OTS.
The company attributed it to the way loan modifications were carried out, and not the concept of modification itself, which has been attacked as of late.
Recently, Fitch estimated a 60+ day re-default rate of 60-70 percent after 12 months, thanks to streamlined modification efforts that fail to document or verify income, along with declining home prices and rising unemployment.
The company recommended a combination of principal reductions and interest rate cuts to create sustainable monthly mortgage payments and reduce re-default rates going forward.